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Features : Roundtable: Treasury & Cash Management

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Global Finance brought together a group of experts to discuss how global solutions, changing regulations and non-bank providers are transforming treasury and cash management operations.

GLOBAL FINANCE:
Is it possible or desirable for a corporate to concentrate liquidity and cash management around a single global bank, or is a region-by-region approach preferred?
ELYSE WEINER,
managing director and global liquidity and investment product head, Citigroup: From a pure treasury perspective, you want to get the most utilization from your cash internally, and that’s going to be facilitated by consolidating it within a single global bank. But there might be some issues to consider when looking at total transactional requirements, most notably concerns around risk management, credit extension and local business practices.

Lindow: The underlying themes are consistency and
visibility

Srivastava:
Technology
is driving a lot of the
standardization

PHILLIP LINDOW,
head of global liquidity and investment management, ABN AMRO: The evolution in banking has made it much easier. And it’s not just the large corporates that are doing global cash concentration; it’s the middle market and smaller-size companies. For them it can be easier to effect centralization as they don’t have the kind of large, complex receivable flows, which normally challenge a large multinational. Another driver to consolidating globally is Sarbanes-Oxley. Corporate treasurers might be uncomfortable with their knowledge of some of the lesser-known local banks, and they want to consolidate their funds with banks they know and trust. We also see big corporations starting to globally manage a single-dollar book—automatically concentrating dollars that are coming in and being paid from a hub in, say, New York or Europe.

WEINER:
After the introduction of the euro, the focus was on taking advantage of that environmental change to implement euro pools in Europe. Once they saw what they could do with the euro, companies said, Why not global dollars? Now they’re moving on to multi-currency applications.

LINDOW:
You’re also seeing concentration on the global side, where you automate the drawdown out of your local banks into a central consolidation bank. And many entities consolidating regionally are now consolidating cross-currency regionally as well.

WEINER:
We divide core liquidity management into three streams. Global visibility is one of the primary requirements. Treasurers need to see their positions across all their banks, locations and operating subsidiaries. The second stream is analytical—things like cash forecasting. The third phase is execution and optimization—being able to take an action based on the analytics. This includes application of liquidity management products and services such as pooling, automated cash concentration and investment services.

STEVE CANNING,
general manager UK, XRT: It’s very rare that people consolidate with one bank on a global basis. We’re seeing structures where they’re consolidating in a regional bank—and they might even subdivide the region—but it is rare to find one global bank. More and more people are also extending their forecast window far beyond the one week that people normally work to, to a month or even three-month forecast. And they’re getting more and more accurate, so people are having a better view of their positions.

SANJAY SRIVASTAVA,
chief operating officer, Aceva Technologies: For the right framework for the single-bank/multi-bank decision, look at best practices outside the financial world. We know the key to business competitiveness is multi-supplier relationships. Also, treasurers are starting to now think about working capital—receivables and payables. This requires an open approach where you can work across multiple-bank relationships and ultimately utilize the best pieces, and technology has proven to make this work. Treasurers are using the right technology platform to apply key goals around liquidity management, risk management, operations efficiency and compliance management consistently across multiple relationships and reaping the benefits of the competitive environment.

WEINER:
Because of some of the payments standardization initiatives going on, such as SEPA, it is no longer the case that you can only get standardization within a single bank. Now you can get standardization across a region. Additionally, there are ongoing initiatives around standardization of communications protocols such as TWIST and RosettaNet.

SRIVASTAVA:
Technology is driving a lot of the standardization since you can work across multiple banks and tie it all together seamlessly using the right enterprise cash flow platforms. Equally, banking offerings are getting very commoditized; each relationship is starting to look like the others. That is where technology reinserts itself because banks are having to innovate continuously to differentiate their offerings relative to the others.

LINDOW:
Banks are becoming much more deeply embedded in their clients’ entire working capital management chain. Some of the changes in the industry are going to make this integration even easier going forward. Alignment of the physical and financial supply chains is made possible by integrating with both your banking partner and logistics provider. By doing this, you will be able to get that extended added value out of your bank; there is a natural drive toward consolidation or, at least, structures that consolidate cash.

SRIVASTAVA:
The key thing is it’s not only about cost; it’s about getting the best value for your business in a very competitive marketplace. That’s a combination of cost, products and services. The banks that can deliver that will get a disproportionate size of that opportunity.
WEINER: There still is a relationship aspect to consider. From a cost perspective, maybe one bank is a little better than another, but you have to take into account the relationship value-adds such as expertise and customized solutions.

CANNING:
We interface with over 200 banks around the world, and we give our clients the ability to chop and change between their banking relationships. A lot of people think that’s a great bonus because that means that if they find a relationship is not beneficial to them, then it’s easy to switch from one bank to another. That’s one of the reasons why you’re seeing banking relationships on a regional basis rather than on a global basis, because if you put all your eggs in one basket, it’s a major, major upheaval to move from one bank to another on a global basis. We have one or two that have gone on a near-global basis with a major bank, but they’ve still maintained the local relationships in some of the lesser-known parts of the world—but they pull everything out through one central bank. But most are doing it on a truly regional basis.

GF:
How have Sarbanes-Oxley and similar laws in other countries driven liquidity and other cash management practices?

LINDOW:
In some cases it’s pushing companies to consolidate into fewer banks because they just want to cut down the number of bank relationships they need to monitor. Treasurers are also becoming more directly involved in what’s going on with day-to-day cash. They want to see a lot of transparency. So reconciliation issues are quickly escalated to top management; the amount of involvement from the top has gotten much deeper, much quicker.

SRIVASTAVA:
Today, most corporations can reactively report on non-compliance, on a look-back basis. But this isn’t enough. The forward thinkers are already moving on to proactively ensuring compliance—through real-time monitoring of transactions and resolving issues as they arise. The largest impact of this is that it forces companies to think about their transaction processes and monitor how the money flows within and outside the company. As we move to more of a proactive monitoring world, companies will use technology that enables them to monitor transactions in real-time and automate those control points.

Weiner: Treasurers need to see their positions across all
their banks

Canning: There is a lot of stress on companies to update their technologies

WEINER:
One of the basic concerns we see with respect to control is account opening and closing. This is so complex for a company that’s operating in multiple countries. The treasurer needs to know who has signing authority on the account, who opened it, how many accounts they really have. There are still large and sophisticated companies out there that have no idea how many accounts they have or what’s in them or who’s got the signing authority. Treasury functions are starting to get involved in all of these nitty-gritty details in response to the increasing focus on control.

GF:
What impact will the enforcement of the Single European Payments Area [SEPA] have on corporates, banks and their software solution partners?

CANNING:
They’re regionalizing based upon currencies. If you’ve got one local payment area where, in theory, it should be the same cost to pay wherever you pay it from, they’re now going to centralize the treasury operations. It cuts down administrative costs considerably by just having one single payment location.

LINDOW:
There is a lot of stress on companies to update their technologies to handle having all their payments coming into a single account. As companies reduce the number of accounts they have, there’s been significant demand on the software vendors to make reconciliation work more accurately. This may slow down the adoption of SEPA into a single account. From the liquidity and cash management perspective, SEPA brings standardization within Europe of cut-off times, payment timing, value-dating—and cost. That will make operating a consolidated cash pool much more efficient.

SRIVASTAVA:
Most treasurers want to see this happen as soon as possible because they are under pressure to cut the total cost of financial operations from the current levels around 5% of revenues to 3% or 2%. Utilizing SEPA, they’ll be able to set up shared services centers that drive the cost of payables and receivables processing further down.

WEINER:
Yes, SEPA is going to facilitate the consolidation of payments processing by corporations. On top of SEPA, you have more countries coming into the EU and eventually joining the euro, so you’ll see even further consolidation. The impact on banks is likely to be the most profound.

GF:
Is it possible some non-bank providers may disintermediate banks from the payment process? What are some of the top untapped opportunities to apply technology in the cash management area?

WEINER,
The question keeps coming up: What is the role of technology companies in the payments process? The technology company may provide the interface, but the bank still extends credit and maintains the risk.

LINDOW:
I see technology as providing ways to streamline the banking process. Banks spend a lot of money on their in-house systems. The role of the technology firms could become more generic, filling the gaps.

SRIVASTAVA:
The key question is whether it is the bank or the technology company that will provide innovative technology that’s of most value to the companies they work with. One of the biggest challenges for treasurers working with banks is that typically about 8% to 10% of the data coming never reconciles with the ERP system; people have to resolve it manually. This issue has been around for years now. Technology can actually reconcile those transactions such that incoming information is 100% reconciled to the ERP. Whoever provides that solution will ultimately add a lot of value to the end-user.

WEINER:
Look at something like CLS—which is basically a clearinghouse for FX settlement. Ultimately the liquidity within the clearing systems has to be managed by the banks. Only a bank can maintain the risk, credit and liquidity controls to ensure payment finality.

CANNING:
One of the big problems is that reconciliation tools are only as good as the information you get from both parties. If the information we’re getting from the bank or from the ERP system is not good enough, we can’t reconcile it. The standardization needs to be there. Then you’ll get near 100% reconciliation.

GF:
How should a CFO define best practices considering liquidity, risk management, compliance and operations?

SRIVASTAVA:
That links to the idea of treasurers establishing a consistent set of policies across enterprise cash. Treasurers don’t want to get caught up in the daily reviews of every single different account or different country positions, but they want to be able to make standardized decisions at one time and have some sort of a platform that actually implements that consistently around the world. You want to be able to see the forest for the trees. They want to be able to know what is going on at any level in their organization and actually act on that information. Technology platforms enable this today.

WEINER:
“Best practice” is somewhat misleading because what works for one company might not be the best solution for another. When structuring a liquidity solution, one has to consider the unique and particular tax, organizational and financial goals of the enterprise.

LINDOW:
Control is probably the key word right now. The underlying themes are consistency and visibility, and you should benchmark your practices on that. You can also benchmark your company by industry standards of days sales outstanding.

CANNING:
Treasurers are going out asking third parties to help them establish best practice within their treasury operations. They are accepting that they might not already be doing everything as well as they could.

LINDOW:
They’re also asking their consultants or their auditors about issues and concerns other clients have had, and to point out to them pitfalls or challenges.

WEINER:
The banks are taking on more and more of that responsibility, but we also walk a very fine line because we can’t be perceived as offering tax or accounting advice. We advise our clients to consult with their internal tax, legal and accounting advisers prior to reengineering their treasury operations or practices.

GF:
How are cash investment and liquidity management practices changing?

CANNING:
In the past six to nine months, more and more of our corporates are talking about a different approach. SOX says you have to ensure you’re getting the best return on investments, so companies are beginning to use portals where they can do all their FX, all their money market investments from one place, rather than ringing round to individual banks. Things are changing in that market a lot and, I believe, will continue to do so.

LINDOW:
Software is helping with forecasting and helping cash managers identify their core cash. Now that treasuries have a better handle on forecasting and their core cash, they are often doing cleverer things with them than just time deposits—like investing in higher-yielding funds.

WEINER:
We find that corporations are not choosing to invest working capital in exotic instruments because safety and security are ranked number one above yield—always. Better forecasting is paying off. Corporations that forecast effectively earn on average an additional 30 basis points on their investment portfolios.

LINDOW:
The reporting is another factor. If I’m a treasurer investing to a consolidated portfolio, I also get consolidated reporting out of that.

SRIVASTAVA:
There is a lot of interest now in the money that’s just stuck in the financial supply chain: How do you pull money out of unnecessarily bloated working capital and put it to more productive use? The financial supply chain is still stuck in month-long cycles, and that’s costing companies a lot of money that’s not in either operations or in invested capital. And it isn’t getting any better on its own. Treasurers can apply the same skills to the working capital area and deliver significant incremental results to the bottom line.

CANNING:
The financial value chain has extended from just the pure treasury to the payments on one side and the collections on the other. You can have a much better cash management situation if you can get better control over your payments and your collections; you’ve got a complete chain.

WEINER:
A lot of corporates today have record levels of cash on the balance sheet, so now they want to know, What is the optimal level of cash one should hold on the balance sheet, and is it being effectively deployed within the organization? As you become more efficient, you start to impact the dynamics of the balance sheet. Once you start to free up this working capital, you then have to decide what do to with it to maximize return.

GF:
What is your vision of the future of this business?

SRIVASTAVA:
The top 1,000 companies in the US, western Europe and Japan have $2.5 trillion on the balance sheet for accounts receivable. That’s a tremendous amount of capital that is stuck in the financial supply chain. In the next 10 years that cash is going to move around, and as it moves from one end of the supply chain to the other, it will transform a lot of components of the industry around it. For the treasurer it’s a large opportunity. By redistributing the capital into more efficient areas, it brings down the weighted average cost of capital for the corporation.

WEINER:
I see a growing integration of the core components of the cash conversion cycle across the financial supply chain. This integration will serve to release working capital to be redeployed into value creation such as investments in new markets and new products.

LINDOW:
The big trend I see is that small and medium enterprises will be adopting best practices from the very biggest corporations. They will adopt processes that have been streamlined, tested, and proven efficient by these large corporations. These automation and consolidation structures being adopted by medium-size and smaller firms can have a tremendous impact, and they can get projects put in very quickly, very efficiently.

WEINER:
The banks are helping in this regard. They are offering “light” versions of some of their more advanced electronic banking platforms specifically for SMEs to give them some of the visibility and control they might otherwise not have.

CANNING:
The actual cost of treasury management systems has come down dramatically, and there is a drive to make deployment much easier. There’s a big drive to use DotNet technology to deploy systems. We’re seeing huge demand from companies—once they centralize all their cash management and their treasury functionality—that want to give their subsidiaries the ability to see what the positions are and to accurately forecast their requirements.

INTERVIEW: SARAH JONES, JPMORGAN CHASE

GLOBAL FINANCE:
How should companies assess the total value of liquidity management?

JONES:
When you’re talking about the value of liquidity management, yield is only part of the equation. If you look at the investment process holistically, the true cost of investing includes costs associated with monitoring currency and rate risk globally. Then there are infrastructure costs for systems and people. The company’s banking partner can offer ways to take costs out of the process—for instance, automating investments to increase efficiency. Banks also add value by freeing up time and resources so clients can focus on strategic priorities.

GF:
What should a CFO or treasurer consider when looking to achieve best practices in liquidity management?

JONES:
One basic requirement for best practice is an investment policy that reflects the company’s strategic direction and facilitates the investment decision-making process. The guidelines have to consider many factors—from performance objectives and tax issues to market trends and currency rates—while providing the flexibility needed as the company grows and changes. Another requirement is to develop solid cash forecasting capabilities. Research shows that while the majority of companies project cash out for 30 days or more, only about half use the forecast to manage liquidity and make investment decisions. The challenge then is not just to accurately track and anticipate streams of cash, but also to leverage net global cash flows—minimizing external borrowing and related costs and maximizing returns through investments. To get to best practice, companies should also consider concentrating their operating relationships with their banks. More companies are finding that concentrating cash with fewer providers forms the basis for improved forecasting and optimized investments.

GF:
What is the relationship between consolidation and diversification?

JONES:
Traditionally, companies have established a network of banks for operating services to help mitigate risk—multiple providers with the ability to spread counterparty, credit and operating risk and hedge against market movements. But today many companies are consolidating providers because they find that dividing cash, liquidity and investment management among a number of banks can actually decrease control, fragment the flow of information and exacerbate risks.

GF:
How do companies determine whether consolidation is right for them?

JONES:
Companies often take a phased approach to consolidating their banking relationships to see how it works for them. Some may first consolidate treasury operations by region and then globally. Others may choose to start with one legal entity and extend it to others. Regardless of how companies approach consolidation, the overwhelming sentiment from clients has been that the positives of concentration with the right provider lead to better control and diversification.

GF:
What are companies looking for from their banks as they consolidate relationships?

JONES:
My experience has been that when companies are narrowing the field of providers, they are looking for a bank that can go well beyond providing a competitive return. Banks are increasingly being challenged to put together true end-to-end concentration and investment solutions—all the way from local third-party providers of cash concentration structures to centralized automated investment sweeps for higher yields.
The banks that can integrate the cash concentration and investment equation—and also provide the reporting that ties it all together—will be the ones that companies look to as their global requirements evolve.
Flexibility is key: Each company has different needs, and each should seek a provider that can adapt to the liquidity requirements of the company, rather than expecting the company to adapt to the bank’s model. Banks that can provide a choice of concentration methods and concentration centers and a diverse range of investment options will enable their clients to make the most of global cash.

GF:
What are some of the issues that will continue to challenge CFOs and treasurers?

JONES:
Companies will continue to take measures that give them greater control over their cash—not just to operate more efficiently and reduce costs, but also to mitigate the risks of doing business in a global marketplace and especially in emerging markets. So the trend toward consolidating cash—and making decisions and investments based on a global position—will continue. Regulatory constraints, such as those imposed by Sarbanes-Oxley, will also continue.
The trends are leading to a time of more standardization in treasury operations and greater transparency in reporting, giving CFOs and treasurers more opportunities than ever to create sustainable value for their companies.